Pressed by Canada's premiers, Prime Minister Stephen Harper acknowledged in last year's election campaign that there was a serious fiscal imbalance between Ottawa, which currently has about a $7 billion surplus, and the cash-strapped provinces. He promised to make things right.
But Ontario Premier Dalton McGuinty and his fellow premiers are sharply divided on how best to do that, as they prepare to meet next month in a pre-budget get-together to discuss how Finance Minister Jim Flaherty might proceed. They need to get their act together.
The premiers all agree that Ottawa has billions more than it needs while the provinces have too few resources. Beyond that there is no consensus.
McGuinty rightly proposes that Ottawa's first priority must be to restore fairness to federal transfers for programs such as health care, welfare and post-secondary education. On a per capita basis, Ontario and Alberta receive less cash for these programs than the other provinces. Once fairness is restored, McGuinty argues that the best way to fix any residual federal/provincial imbalance is to give the provinces equal per capita grants. Ontario would gain the most. McGuinty calculates that Ontario should get $2 billion to $3 billion under any fair deal.
However, Premier Jean Charest of Quebec and premiers from the other so-called "have-not" provinces aren't as interested in transfers. They believe the problem stems from a flawed equalization formula that leaves them too poor to provide comparable services to the richer provinces, which is what the complex equalization program is supposed to do.
And Canada's richest province, Alberta, has further complicated the matter by making common cause with Saskatchewan and Newfoundland and Labrador to insist that the billions of dollars that flow from non-renewable resources such as oil and gas not be included in any new equalization scheme. Other provinces want resource revenues factored in.
Even though Flaherty has warned that he will settle the issue himself if the premiers fail to forge a consensus, they keep on meeting, and disagreeing, even though a sensible solution is already on the table.
It was put forward in May by a task force headed by former Alberta deputy treasurer Al O'Brien in a report called Achieving A National Purpose: Putting Equalization Back on Track. The task force argued, rightly, that equalization has become unglued from the principles on which it was first put in the Constitution. To remedy this O'Brien recommended:
Ottawa should reinstate a full 10-province average for determining the standard for equalization instead of the current five-province average, which leaves the richest and poorest provinces out of the calculation, a skewed approach that makes no economic sense.
Only half of provincial resource revenues should be included in calculating the size of the equalization pie. But a resource cap would guarantee that no province that gains from equalization would end up "richer" than one that doesn't. This strikes a compromise on the issue.
Ottawa and the provinces should scrap the politically driven economic side-deals that former prime minister Paul Martin struck with Newfoundland and Labrador and Nova Scotia. Those messy deals make little economic sense and undermine the principles of equalization.
If these key principles were followed, Ottawa should be able to deliver a more equitable new deal at a very manageable cost of less than $1 billion.
Beyond that, whatever money Ottawa may be prepared to hand over to the provinces to rebalance finances should be distributed on the basis of the equal per capita grants McGuinty has called for.
A consensus on these lines would result in a fairer and more balanced sharing of the nation's wealth. If McGuinty and the others can't agree, Flaherty should act in the national interest and adopt this approach.